The LOI Is the Starting Line, Not the Finish Line

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Most buyers get the letter of intent wrong in the same two ways, and neither is about the price. They put too much in it, and they think signing it means the hard part is over.

The letter of intent is the point where most buyers either get out of their own way or start tripping over their own feet, and the mistakes I see are almost never about the price. They are about misunderstanding what the letter is for and what it sets in motion.

Start with the most common one, which is overcomplicating it. A buyer, often a careful one, sits down to write the LOI and tries to nail everything down at once. The most frequent version of this is a detailed working capital calculation, worked out to a precision that belongs in the definitive purchase agreement and nowhere near a letter of intent. The instinct is understandable, because working capital is a real issue and it will matter enormously later. But grinding through the mechanics of it in the LOI does not protect the buyer. It does the opposite. A seller who receives a letter dense with calculations and contingencies that should have been left for the definitive agreement starts doing math of a different kind, about how much this buyer is going to cost them in legal fees once the real document is being negotiated. If the LOI redline is already this difficult, the seller thinks, the purchase agreement is going to be a bloodbath. And when a seller is weighing more than one interested party, that impression can be the thing that moves a buyer down the list.

The LOI has a narrow job. It sets out the price and the structure clearly enough that the seller knows what is being proposed and can decide whether to take the company off the market and into an exclusive diligence period with this buyer. It is not there to litigate every term but to establish the shape of the deal and show that the buyer is serious, credible, and someone the seller will not dread negotiating against. The detail comes later, in the document built to hold it.

Price and structure are the one part that does need to be clear and reliable, because that is what the seller is actually evaluating. The buyer is presenting a proposed financial structure, cash at close, any seller financing, any earnout, and the seller is going to make a real decision based on it. Which means the buyer should be as certain as they can be, before they put a number in the letter, that they can source the down payment and secure the financing to close at the price and structure they are proposing. A number a buyer cannot actually fund is worse than a lower number they can, because putting it in the LOI and then coming back later to change it, what the industry calls re-trading, is one of the fastest ways to lose a seller’s trust and sometimes the deal. This is where the financing work from earlier in a search pays off. A buyer who already knows what they can fund writes an LOI they can stand behind.

Then there is the misunderstanding that causes the most trouble after the letter is signed, which is that a lot of buyers treat the LOI as the finish line. They get it signed, they exhale, and they behave as though the deal is essentially done and the rest is paperwork. It is the opposite. The LOI is what opens the extensive due diligence phase, and the real work of the transaction is all still ahead. A buyer who relaxes at signing is a buyer who is mentally checked out at exactly the moment the deal demands the most attention.

And here is the part buyers understand least of all. During that diligence phase, the seller is not finished evaluating the buyer. The diligence runs in both directions. While the buyer is examining the business, the seller is still watching the buyer, still forming a judgment about whether this is a person they are comfortable handing their company to. A seller can walk away from a signed LOI. It is non-binding, and if the seller learns something during the process that makes them uneasy about the buyer, about how they operate, how they treat people, whether they are honest when something inconvenient surfaces, the seller has every right to end it and often will. I wrote in an earlier piece that a seller is handing over what may be their life’s work and wants to hand it to someone they trust. That evaluation does not stop when the LOI is signed. In many ways it intensifies, because now the seller is watching the buyer act under the pressure of a live deal rather than just talking in a first meeting.

So the buyer who thinks the LOI locks the seller in has it backwards. The letter locks in a period of exclusivity and a framework for diligence. It does not lock in the seller’s willingness to sell to this particular buyer, and that willingness has to be earned continuously, all the way to closing. The buyer who understands that behaves differently in diligence. They stay engaged, they stay straight with the seller when a problem comes up, and they keep building the relationship rather than assuming it is finished business. The buyer who does not understand it can do everything right on the numbers and still lose the deal because they stopped paying attention to the person on the other side of it.

None of this makes the LOI less important. It makes it important for the right reasons. A good letter of intent is clean, clear on price and structure, light on the detail that belongs elsewhere, and backed by a buyer who can actually close what they are proposing. It opens the door. What happens after that, and whether the seller is still comfortable walking through it with this buyer by the end, is where the deal is actually won.

A note for the CPAs who refer clients to me

The working capital point in this piece is one you will recognize immediately, because working capital is your territory, and a client who is going to buy a business needs to understand it well before it becomes a live negotiation. The mistake I describe, trying to resolve the working capital calculation inside the LOI, usually comes from a buyer who knows just enough to know it matters and not enough to know when it gets settled. That is a place where your involvement early is worth a great deal, because you can help a client understand the mechanics so they hold the issue for the definitive agreement rather than forcing it into the letter and unsettling the seller. When you have a client heading toward an acquisition, having me and you both in the picture means the buyer gets the deal sequencing right, and the financial terms they commit to in the LOI are terms they can actually live with when the detailed work begins.

A note for the wealth advisors

The discipline this piece asks of a buyer, do not propose a price and structure you cannot fund, is directly connected to the assets you manage, because the down payment usually comes from them. A client who commits in an LOI to a structure their liquidity cannot actually support is a client who is either going to re-trade and damage the deal or scramble to pull money from places in the plan that should not be touched. Both are avoidable if the funding is thought through before the letter goes out rather than after. When a client of yours is moving toward an offer, being in that conversation early lets you confirm what can be funded and how, so the number that goes into the letter is one the client’s balance sheet can actually stand behind, and the plan you have built together does not get disrupted under deal pressure at the worst possible moment.